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The tax man wants me to send Staples a 1099??? An exercise in absurdity

You know those moments when you read something in the paper, convince yourself that you must have misunderstood and go back to see what the article really said? Well, I just had one of those moments while reading yesterday's Wall Street Journal.

An article entitled Why the Self-Employed Might Owe OfficeMax a 1099 reports on collateral damage from health care reform. Apparently, to pay for some of its costs, lawmakers have vowed to close an estimated $300 billion 'tax gap' by requiring everyone who does more than $600 worth of business with a vendor in a year to file a 1099 form stating how much they paid the vendor. This is the case whether it's Larry's Plumbing in to address your leaky flipper valves or a huge company like Staples or OfficeMax. What nobody is talking about is that the burden doesn't just fall on filers for the over-$600 purchases. To actually comply with this provision, a small business person, charity, church or sole proprietary would have to track every purchase just to see whether they crossed the $600 threshold over the course of the year or not. The record keeping burden is hard to fathom.

So are the unintended consequences. As the article points out, it will create incentives for small business owners to split up their purchases among different vendors so that they don't cross the $600 line. It will create incentives for vendors to set up different billing entities so that people can continue to do business with them without having to file. And it certainly creates a massive new bureaucracy to receive, check and account for all that information. Plus, I can promise you the information is bound to be inconsistent and erratic. I've been receiving 1099's for years for my independent speaking and consulting work, and I can tell you that companies are totally inconsistent in how they file. Some include travel, some don't. Some include goods (like books) while some don't. Some report for the calendar year, some for the fiscal year. Some report only payments made and not yet billed, while others report everything billed in a year whether or not they have cut the check. It's a nightmare, but manageable since we're not talking about big numbers. But once you start getting into the hundreds or even thousands of transactions, the mind boggles.

Oh, and if the vendor doesn't give you their tax ID number, you're supposed to withhold federal taxes on their behalf and send it off to the IRS! Unbelievable.

Before implementing something as bone-headed as this, here is a perfect opportunity to get some actual evidence of its efficacy. Try it on a small scale and see whether the costs are worth the gains. See if the gains occur at all – my guess is that people who have been skillfully avoiding taxes under the old regime will continue to be equally creative under the new one. The ones who will suffer – as always – are the ones who are going to try to do their best to comply.